Knight Capital fighting for its life

Knight Capital fighting for its life

Knight Capital Group Inc. fought for survival on Thursday after a $440 million trading loss caused by a software glitch wiped out much of its capital, forcing Knight to seek new funding as its shares plunged almost 80 percent in two days.

Many of the company's biggest customers, including TD Ameritrade, the No. 1 U.S. retail brokerage by trading volume, and fund giants Vanguard and Fidelity Investments, stopped routing orders through Knight. One of the biggest fears is that the company will collapse, landing trading partners with losses.

"They have about 48 hours to shore up confidence," said James Koutoulas, head of an advocacy group for former customers of failed brokerages MF Global and Peregrine Financial.

Knight said it is "actively pursuing its strategic and financing alternatives," raising the likelihood the firm will be sold or face bankruptcy because of the loss and subsequent damage to business.

As one of the leading market makers in U.S. stocks, Knight is among the firms that are critical to smooth, orderly trading. Market makers match orders from buyers and sellers and often provide liquidity by stepping into the market themselves.

The speed at which Knight has unraveled has been particularly unnerving for investors and markets. It resulted from problems with the firm's trading software that sent bogus, rapid-fire trades into the market for 45 minutes on Wednesday and left Knight with big losses on numerous stocks it bought at inflated prices.

Knight is in talks with Silver Lake Partners-backed trading firm Virtu Financial LLC about a possible deal, according to The Wall Street Journal. Knight has approached JPMorgan Chase & Co for financing, according to a report on Fox Business Network. A spokesman for JPMorgan declined to comment. Spokeswomen for both Knight and Silver Lake also declined comment.

Knight's $440 million trading loss has reignited debate over whether technology has elevated risk in trading to unacceptable levels.

The U.S. Securities and Exchange Commission on Thursday said it would consider whether new measures might be necessary to safeguard markets.

"We continue to closely review the events surrounding yesterday's trading and discuss those events with other regulators as well as Knight Capital Group," said SEC spokesman John Nester.

"We also are considering what, if any, additional steps may be necessary, beyond the post-Flash Crash measures that limited the impact of yesterday's trading," Nester said.

Advocates of trading systems that can pump thousands of shares across Wall Street in milliseconds say the fault lies not in the systems but in the lack of controls at individual firms. Knight blamed its technology breakdown on new software that routed a flood of erroneous orders to the New York Stock Exchange on Wednesday, but offered no explanation as to why traders didn't immediately intervene to arrest the obvious errors.

DISASTERS SEEN INEVITABLE

Trading veterans say the sprawl of trading venues in the United States coupled with the constant tinkering with software codes and systems upgrades have led to such complexity that disasters are bound to occur. Since March, a series of embarrassing technology issues, including the botched Facebook trading debut after its IPO and the failed public offering of BATS Global Markets have rocked markets and shaken the confidence of investors.

"You've got 13 exchanges, 50 dark pools, brokers that internalize client orders at their own desks and thousands of algorithms pumping orders in milliseconds," said Larry Tabb, founder of Tabb Group, a financial consulting firm. "The structure just may be too complicated to work."

But some experts fear that a regulatory and populist backlash -- let alone protests from competitors -- will reverse advances that benefit investors.

"I'm very worried people will take a look and say there is something fundamentally wrong with the market, and there isn't," said Maureen O'Hara, a finance professor at Cornell University who sat on an advisory panel that explored reforms after the U.S. stock market collapsed inexplicably in a few minutes in the 2010 "Flash Crash."

USING OTHER MARKET MAKERS

Several large retail brokerages said they had not resumed trading with Knight, instead routing orders to other market makers. TD Ameritrade, which usually routes about 4.5 percent of its orders through Knight, is currently not sending orders through the firm, said Joe Kinahan, its chief derivatives strategist.